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What types of consumer credit are available?
There at least three basic types of consumer credit:
Noninstallment
credit is the simplest form of credit and is usually for a very short
term, such as 30 days. The buyer makes one payment at or before the end
of the credit period. This kind of credit enables consumers to take
possession of property immediately and pay for it within a short time.
Many department stores offer noninstallment credit to their regular
customers; this enables the store to make sales and get the money in
the near future, thus generating better cash flow for the business than
might otherwise occur.
Installment closed-end credit is
another form, where only a specified amount of money is lent to the
consumer, typically the total purchase price of the goods. This kind of
credit is also used by department stores for the sale of large items
and by auto dealers for the sale of automobiles. For example, if you
purchase a sofa and chairs at a furniture store, the store might give
you credit up to the full amount of the sale, which will be repaid with
interest, but the store does not make further credit available to you
under that agreement. The full amount of the principal and interest
must be paid within a pre-determined time period. In this kind of
credit the lender usually retains title to the purchased goods until
all the payments have been made. If the purchaser defaults on payments,
the seller can repossess the property.
Revolving open-end credit
is found with most credit cards. In this kind of credit the lender
extends credit for use by the consumer, with an outside limit that
depends on the debtor's credit history and ability to handle the debt
repayment. The financial institution gives the debtor a credit card
with a credit limit, such as $1,000, $5,000, or $10,000, and the debtor
can choose how much of the available credit s/he will use at any given
time. The debtor makes periodic (usually monthly) payments, and
continues to use the available credit as needed, as long as each
periodic payment meets pre-determined minimum amounts.
Revolving
open-end credit requires active management by the debtor. The debtor
can decide to pay off the entire outstanding debt when the statement is
presented, pay off more than the required minimum payment (but not the
entire amount), or simply make the minimum required payment. The debtor
thus can determine how much credit will be available to him/her at any
given time.
Other credit cards, like travel and entertainment
accounts with American Express or Diners Club, may have an open ended
amount of credit, but the card holder is expected to pay the balance
off each time period, usually each month.
(Reviewed 10.31.2008)
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